...Comments: The case provides an excellent vehicle for exploring and challenging the notion of optimal capital structure in theory and practice. American Home Products (AHP) is a very successful firm that has not debt in its capital structure. Because of its efficiency in asset management and its high level of profitability, AHP does not need debt to finance its operations. The case focuses on the theory of optimal capital structure and the practical problem of determining an optimal debt ratio. Questions 1. How much business risk does American Home Products face? Some of the pros/cons affecting AHP’s business risk are: PROS: • Sales stability, net sales has grown steadily from 1972-1981 • Strong Marketing expertise • Tight financial control • Stable, consistent financial growth and profitability • Risk aversion can work in favor of the company(no licensing costs, R+D costs) • Threat of new competitors is low because the pharmaceutical industry requires high start-up costs and the companies controlling the industry are very stable and mature. CONS: • Conservative Corporate Culture affect innovations • High cost in marketing to erode competitor’s head start. They are heavily depending on current products and marketing skills. But competitors can also strengthen their marketing strategies. • Hard to expand into new markets due to low R+D • Reticence does not provide confidence to the public • Threat of substitutes...
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...American Home Products Corp. How much financial risk would American Home Products face at each of the proposed debt levels shown in case Exhibit 3? What debt rating would American Home received at each of the proposed debt levels? Comparison Table $ in million USD | American Home Products Corp. | Warner. Lambert Company | | Actual | Pro Forma 1981 for | Actual | | 1981 | 30% Debt to Total Capital | 50% Debt to Total Capital | 70% Debt to Total Capital | 1980 | Net Worth | $1,472.8 | $877.6 | $626.9 | $376.1 | $1,482.7 | Earnings per Share5-year CAGR | $3.1812.4% | $3.3312.4% | $3.4112.4% | $3.4912.4% | $2.413.0% | Return on Equity | 33.8% | 51.5% | 63.9% | 110.5% | 13.0% | Interest Coverage | 415.13 x | 17.5 x | 10.5 x | 7.5 x | 5.0 x | Debt to Total Capital | 0.9% | 30.0% | 50.0% | 70.0% | 32.4% | Bond Rating | AAA | | | | AAA/AA* | American Home Products Corp. (AHP) has 4 business lines i.e. xx, xx, xx, and xx. The foods and household products were the large market but potentially very competitive in price and can lead to low profit margin. On the other hand, the prescribed and packaged drugs were more protected and can contribute higher margin but they need high capital to invest in R&D or acquiring drug patents to stay competitive in the market as well as generating profitable business. In the past AHP has capital structure policy to utilize their self-generated capitals to run their business with little to none outside debt. With this policy...
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...American Home Products Corporation INTRODUCTION The chief executive of American Home Products (AHP), William F. Laporte, is a man who is debt averse. Mr. Laporte is a man who does not like to spend money and his management style has produced outstanding financial success. However, Mr. Laporte will be retiring soon, which could mean AHP will have a new executive who may wish to change the capital structure by adding debt in order to increase shareholder wealth. At the time, AHP had practically no debt on its balance sheet; while the most comparable company, Warner-Lambert had a debt ratio of 32% and a bond rating between AAA and AA. PROBLEM STATEMENT The inevitable retirement of AHP’s chief executive has analysts wondering what, if any, change to AHP’s capital structure might look like. Furthermore, analysts are curious to know what the size of the payoff would be with such a policy change. ENVIRONMENTAL ANALYSIS There are both advantages and disadvantages to leverage in a capital structure. If AHP chose to use leverage in their capital structure the interest expense would be tax deductible and therefore lower the cost of the loan and their tax liability. Additionally, by incorporating debt into their capital structure AHP would only have to pay back the loan principal plus interest; whereas with equity, shareholders have direct claim on future profits, if any. Conversely, the larger debt-to-equity ratio, the more risky AHP would appear to investors due to the greater possibility...
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...1) As it has been mentioned in the case, American Home Products (AHP) is a successful and a highly expanding company that produces a host of products in four separate business lines: prescription drugs, packages drugs, food products, and housewares and household products. The success of the company is mainly due to its outstanding marketing department. In fact, instead of investing money in research and development in order to create new and innovative products, the company prefers to avoid taking risks and market products that are smart extensions of products already marketed by competitors. AHP is a very conservative and risk averse company, so the way it operates its business aligns well with the culture of the company. Another important thing is that for a long time, the company was under a tight financial control and a very conservative capital structure policy. In fact, it operates with an almost debt-free balance sheet in order to avoid any financial risk. currently, AHP seems to have no business risk but may face a certain risk in the long run. Based on the ratios shown on the attached sheet, AHP should not worry about business risk since its working capital is very healthy ($1472.8 million) and cash excess $233 million. The high ROA, high profit margin, low current-to-asset ration and 49.71 collection days show that AHP can generate cash quickly, thus it can maintain current high growth rate. However, its decreasing annual sales growth from 14.1% in 1978 to 8.8% in 1981...
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...Case: American Home Products 1) What are the problems confronting the company? As it has been mentioned in the case, American Home Products (AHP) is a successful and a highly expanding company that produces a host of products in four separate business lines: prescription drugs, packages drugs, food products, and housewares and household products. The success of the company is mainly due to its outstanding marketing department. In fact, instead of investing money in research and development in order to create new and innovative products, the company prefers to avoid taking risks and market products that are smart extensions of products already marketed by competitors. AHP is a very conservative and risk averse company, so the way it operates its business aligns well with the culture of the company. Another important thing is that for a long time, the company was under a tight financial control and a very conservative capital structure policy. In fact, it operates with an almost debt-free balance sheet in order to avoid any financial risk. As mentioned already, under the conservative capital structure policy, the company improved remarkably and both its sales and earnings grew impressively. However, this way of operating may trigger some problems on the long run. Since the company does not invest in research and development, it means that it faces a considerable problem which is the threat of substitutes. Moreover, it cannot expand into new markets and it relies heavily on its...
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...1 1 4 1 C o r p o r a t e F i n a n c e -‐ I I P a g e | 1 C ase I: A merican Home Products Corporation Solutions to various questions are given below: A ns. 1: At Present, American Home Products Corp. seems to have no business risk but may face a certain risk in the long run. As per the ratios, it should not worry about business risk as: Working capital is very healthy ($1472.8 million). Cash excess ($233 million) The high Return on Assets (ROA), high profit margin, low current-to-asset ratio and 49.71 collection days show that AHP can generate cash quickly, so it can maintain current high 14.1% in 1978 to 8.8% in 1981 (Exhibit 1) shows that it faces future risk of losing market shares in all its business lines if it does not foresee competition and A ns. 2: High ROE (30.3). High quick ratio (42.68). Low debt-to-equity ratio (0.09). Low debt-to-asset ratio (0.01) Degree of Financial Leverage EBIT Interest Preferred stock dividend DFL 30% Debt 922.2 52.7 0.4 1.062 50% Debt 922.2 87.8 0.4 1.106 70% Debt 922.2 122.9 0.4 1.155 t has: The above table shows that if AHP increases debt ratio, it will face a financial risk of increased debt-to-equity and debt-to-asset ratios resulting into solvency problems in long terms. AHP also face liquidity problems since the quick ratios decrease when the debt ratios increase. A ns. 3: The Company always focused on giving maximum return to its shareholders...
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...Case Seminar Advanced Corporate Finance Tuesday 10:00 – 13:00, Room 23 Instructor: Tim Adam This case seminar discusses real-world business cases, which relate to the materials covered in Corporate Finance and Advanced Corporate Finance. The main topics are company valuation, capital structure, bankruptcy, corporate governance, project finance and corporate risk management. The main objective of the seminar is to apply the theoretical concepts of corporate finance and corporate governance to real-world situations. To do so we will discuss six Harvard Business School cases. In addition, there will be several company presentations of real-world business cases. This seminar has a high level of practical relevance, but it is also very labor intensive. Expect to spend at least eight hours each week on case preparations. Prerequisites All participants must have successfully passed Corporate Finance, and take Advanced Corporate Finance parallel or prior to this case seminar. Registration Students need to register for this seminar. Please submit your applications electronically (CV, most recent transcript) to Mrs. Bulwahn by April 8, 2016. If you do not attend the first session, your place may be given to other students on the waiting list. Evaluation Four case reports (80%), class participation (20%). Seminar attendance is obligatory. Course materials Cases can be purchased for a total cost of US$ 23.70 using a credit...
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...Evaluating Competitiveness Using Fuzzy Analytic Hierarchy Process - A Case Study of Chinese Airlines Abstract With the development of a national market economy, the Chinese aviation industry is now confronted with international competition. Therefore, it is necessary to research the competitive status of Chinese national aviation, as well as advice on how to enhance the competitiveness of the Chinese aviation industry. The main objective of this paper is to propose FAHP as an effective solution for resolving the uncertainty and imprecision in the evaluation of airlines’ competitiveness. In this paper, we review the research of industrial international aviation competitiveness at both home and abroad, discuss a theoretical framework for the study of aviation competitiveness, establish an index system with 5 first-order indicators and 17 second-order indicators, set up a Chinese aviation competitiveness model based on simple fuzzy numbers from the Fuzzy Analytic Hierarchy Process, and evaluate the competitiveness of 5 major Chinese airlines. The results show that this model and these indicators are scientific and practical, with a wide range of application prospects for the purpose of improving and increasing Chinese airline competitiveness in the international market. The effective approach presented in this paper is especially applicable when subjective judgments on performance ratings and attribute weights are not accessible or reliable, or when suitable decision makers...
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...of popular books describing the heterogeneity of local and global markets. Consider, for example, The Nine Nations of North America (Garreau, 1982), Latitudes and Attitudes: An Atlas of American Tastes, Trends, Politics and Passions (Weiss, 1994) and Mastering Global Markets: Strategies for Today’s Trade Globalist (Czinkota et al., 2003). When reflecting on the nature of markets, consumer behaviour and competitive activities, it is obvious that no product or service appeals to all consumers and even those who purchase the same product may do so for diverse reasons. The Coca Cola Company, for example, varies levels of sweetness, effervescence and package size according to local tastes and conditions. Effective marketing and business strategy therefore requires a segmentation of the market into homogeneous segments, an understanding of the needs and wants of these segments, the design of products and services that meet those needs and development of marketing strategies, to effectively reach the target segments. Thus focusing on segments is at the core of organizations’ efforts to become customer driven; it is also the key to effective resource allocation and deployment. The level of segment aggregation is an increasingly important issue. In today’s global economy, the ability to customize products and services often calls for the most micro of segments: the segment of one. Following and implementing a market segmentation strategy allows the firm to increase its profitability, as...
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...to Lower-48 Markets Table of Contents 1.0 Introduction 1.1 Over-the-Top Route 1.2 Alaska Highway Route 2.0 Part 1 2.1.0 Economic Impacts of the Alaska Highway and “Over-The-Top” Routes on Various Stakeholders 2.1.1 Natural Gas Producers in Alaska 2.1.2 Natural Gas Producers in the Beaufort Sea-Mackenzie Delta 2.1.3 Mackenzie Valley Corridor Producers 2.1.4 Producers in the Western Canadian Sedimentary Basin 2.1.5 Producers in the Supply Regions of the Lower 48 US States 2.1.6 The Global Liquefied Natural Gas Sector 2.1.7: Natural Gas End-use Consumers 2.1.8: Pipeline Operating Companies 2.1.9: American Taxpayer Perspective of the Alaska Highway Route 2.1.10: Canadian Taxpayer Perspective of the Alaska Highway Route 2.1.11: American Taxpayer Perspective of the “Over-the-Top” Route 2.1.12: Canadian Taxpayer Perspective of the “Over-the-Top” Route 2.1.13: Aboriginal Interests 2.2.0: Potential Environmental Impacts of the Alaska Highway and the “Over-The-Top” Routes 2.2.1: Overview 2.2.2: Environmental Impacts According To The Yukon Conservation Society 2.2.3: Environmental Impacts According to CERI 2.2.4: Environmental Impacts on the Beaufort Sea and down Mackenzie Valley 2.2.5: Environmental Impacts According to the University of Alberta Western Centre for Economic Research 2.2.6: Environmental Impacts...
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...BUSINESS INSIGHTS The US Healthcare Market: into the 21st Century by David Sykes Projected value of the US PoM market, 1998-2007 200 180 Expenditure ($bn) 160 140 120 100 80 76 82 89 98 107 118 130 142 156 171 60 40 20 Source: Datamonitor "The vast projected increase in expenditure will offer pharmaceutical companies enormous opportunities to reap commercial reward if they are strategically placed to take advantage of these possibilities" 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0 Business Insights Business Insights is a series of management reports designed to help you make informed, timely business decisions. We understand the problems facing today's managers in taking your business into the next millennium, and appreciate the importance of the role of accurate, up-to-date, incisive market and company analysis. We help you to crystallise your business decision making. Business Insights’ reports are authored by independent experts in their fields and offer results from our unique primary research methodology. Our authors' leading positions allow them to interview key industry executives and to quantify which issues will be of greatest strategic significance in an industry's future. The results of our analysis and recommendations will help you to evaluate the impact of these issues on your business, and plan to position yourselves to take the greatest advantage...
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...Executive Summary: Pfizer-Wyeth Merger Deal Overview: On January 25, 2009, Pfizer and Wyeth entered into the merger agreement, pursuant to which, subject to the terms and conditions set forth in the merger agreement, Wyeth will become a wholly-owned subsidiary of Pfizer. Upon completion of the merger, each share of Wyeth common stock issued and outstanding will be converted into the right to receive, subject to adjustment under limited circumstances, a combination of $33.00 in cash, without interest, and 0.985 of a share of Pfizer common stock in a taxable transaction. Pfizer will not issue more than 19.9% of its outstanding common stock at the acquisition date in connection with the merger. The exchange ratio of 0.985 of a share of Pfizer common stock will be adjusted if the exchange ratio would result in Pfizer issuing in excess of 19.9% of its outstanding common stock as a result of the merger Deal Terms Breakdown: Transaction Value Transaction Consideration Purchase price per WYE share $50.19 Existing Cash Used $22,213 32.7% Cash per WYE share $33.00 New Debt $22,500 33.1% PFE stock value per WYE share $17.19 Total Cash $44,713 65.8% PFE shares per WYE share 0.985 Stock Consideration $23,289 34.2% Premium to 1/23/09 WYE price 29.3% Total Consideration $67,303 100.0% Total WYE shares (MM,diluted) 1,341 Total Equity...
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...ownership Need money Business is declining (e.g. a buggywhip company) Industry-specific conditions Economies of scale BASIC DEFINITIONS: MERGER: Owners of separate, roughly equal sized firms pool their interests in a single firm. Surviving firm takes on the assets and liabilities of the selling firm. PURCHASE: Purchasing firm pays for all the assets or all the stock of the selling firm. Distinction between a purchase and a merger depends on the final position of the shareholders of the constituent firms. TAKEOVER: A stock purchase offer in which the acquiring firm buys a controlling block of stock in the target. This enables purchasers to elect the board of directors. Both hostile and friendly takeovers exist. FREEZE-OUTS (also SQUEEZE-OUTS or CASH-OUTS): Transactions that eliminate minority SH interests. HORIZONTAL MERGERS: Mergers between competitors. This may create monopolies. Government responds by enacting Sherman Act and Clayton Act VERTICAL MERGERS: Mergers between companies which operate at different phases of production (e.g. GM merger with Fisher Auto Body.) Vertical mergers prevents a company from being held up by a supplier or consumer of goods. LEVERAGED BUYOUTS (LBOs): A private group of investors borrows heavily to finance the purchase control of an ongoing business. RECAPITALIZATIONS: Does not involve the combination of two separate entities. Here, a firm reshuffles its capital structure. In a SWAP, the corp takes...
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...States and Globalization Backlash 1917-1945...…………………………………………………………….91 Chapter 5: The Big Leap of Anti-Hegemonic Party States: The Second Wave 1946-1975…………………………………………………………………………………………………………………111 Chapter 6: Globalization Anew and the Marginalization of Anti-Hegemonic Party States 1976-2010………………………………………………………142 Conclusions Introduction: Globalization and Anti-Hegemonic Party State In 1997 the European Commission defined Globalization “as the process by which markets and production in different countries are becoming increasingly interdependent due to the dynamics of trade in goods and services and flows of capital and technology. It is not a new phenomenon but the continuation of developments that have been in train for some considerable time”.[1] Wider definitions incorporate more spheres than the economy, including the intensification of worldwide social, political, and cultural relations as well while stressing their growing extensity, intensity, velocity, and depth.[2] A working definition attempting to integrate the most outstanding features...
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...“Bests” or performance excellence commitments – Best People and Workplace, Best Quality, Best Customer Service, Best Financial Performance, Best Growth ARMC : AtlantiCare Regional Medical Center ASC: Ambulatory Surgery Center ASPP: Annual Strategic Planning Process A AAAHC: Accreditation Association for Ambulatory Health Care AAI: AtlantiCare Administrators Incorporated AAP: Annual Action Plan B BFP: Best Financial Performance Big Dots: The system-level measurements or targets for each of the 5 Bs (performance excellence commitments). Business units (and their departments) have measurable action plans and goals that align with/support the Big Dots. ABCs: AtlantiCare’s Best Customer Service Standards– AtlantiCare’s customer service training program. BMI: Body Mass Index ABH: AtlantiCare Behavioral Health BOT: Board of Trustees ACS: American College of Surgeons BP: Blood Pressure ACR: American College of Radiology...
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